How the SEC’s Recent Win May Play in Its Coinbase, Binance Cases

A
federal
judge
ruled
that
secondary-market
transactions
for
certain
cryptocurrencies
violated
securities
law.
The
catch:
This
was
a
default
judgment.
The
defendant
never
showed
up,
and
no
one
filed
amicus
briefs
to
oppose
the
Securities
and
Exchange
Commission’s
motion
for
a
default
ruling.

You’re
reading
State
of
Crypto,
a
CoinDesk
newsletter
looking
at
the
intersection
of
cryptocurrency
and
government.


Click
here

to
sign
up
for
future
editions.

Judge
Tana
Lin,
of
the
U.S.
District
Court
for
the
Western
District
of
Washington,
ruled
last
Friday
that
Sameer
Ramani
violated
federal
securities
law
by
using
insider
information
to
trade
on
cryptocurrencies
that
would
be
listed
on
Coinbase.

The
ruling
may
have
implications
for
the
SEC’s
other
cases
against
crypto
exchanges
like
Coinbase,
Binance/Binance.US
and
Kraken.
While
a
default
judgment
ruling
arguably
has
less
precedential
value
than
a
ruling
after
a
bench
trial,
or
set
of
hearings
where
the
various
parties
present
their
cases,
it’s
still
a
ruling
by
a
federal
judge.
And,
it’s
a
ruling
in
the
same
circuit
as
other
crypto-relevant
cases.

A
federal
judge
ruled
that
Ramani,
who
was
friends
with
a
former
Coinbase
employee,
traded
securities
based
on
insider
knowledge.

The
case
dates
back
to
2022,
when
the
Department
of
Justice
alleged
that
former
Coinbase
product
manager
Ishan
Wahi,
his
brother
Nikhil
and
Ramani

committed
wire
fraud
and
insider
trading.
Ishan
Wahi
would
share
information
about
Coinbase’s
future
asset
listings
with
his
brother
and
Ramani,
who
then
traded
on
those
assets.

The
Wahis

pleaded
guilty
to
DOJ
charges
and

settled
the
SEC
charges.
On
Friday,
the
SEC

won
its
motion
for
default
judgment
against
Ramani,
the
third
and
final
defendant
in
the
case,
who
never
showed
up
to
fight
back.

While
a
number
of
groups
filed
friend-of-the-court
briefs
before
the
Wahis
settled
the
SEC
charges,
the
Friday
ruling
does
not
appear
to
reference
or
acknowledge
those.

“Courts
reviewing
motions
for
default
judgment
must
accept
the
allegations
in
the
complaint
as
true,”
the
judge
noted.

“Taking
the
allegations
in
the
FAC
[first
amended
complaint]
as
true,
the
Court
finds
that:
(1)
Ramani
traded
on
material
nonpublic
information
that
he
knew
was
provided
to
him
in
breach
of
Ishan’s
duty
as
a
Coinbase
manager;
and
(2)
Ramani’s
misconduct
was
in
connection
with
the
purchase
and
sale
of
securities,”
the
judge
wrote.

In
the
judge’s
view,
the
SEC
had
shown
successfully
–
even
with
the
caveat
that
the
judge
needed
to
accept
the
allegations
were
true
–
that
Ramani
had
insider-traded
with
the
purchase
and
sale
of
securities.

In
her
ruling,
the
judge
listed
the
prongs
of
the
Howey
Test
–
the
Supreme
Court
case
that
acts
as
a
precedent
for
determining
whether
or
not
something
is
a
security
–
and
how
the
complaint
met
those
requirements.
But
she
said
she
based
her
analysis
on
the
SEC’s
complaint,
citing
rulings
from
previous
SEC
cases
against
LBRY
and
Terraform
Labs.

“The
issuers
promoted
the
tokens
based
on
their
potential
for
investment
returns,
which
they
claimed
derived
from
the
promised
efforts
of
the
promoter’s
management
team
to
create,
develop,
and
maintain
an
ecosystem
that
would
increase
the
demand
for
a
token,
and
thus
its
price,”
Judge
Lin
wrote,
referencing
the
complaint
in
her
analysis
of
one
of
the
Howey
prongs.
“A
number
of
issuers
even
posted
their
tokens’
daily
price
on
their
websites.
Any
objective
investor
would
therefore
have
expected
to
profit
from
trading
in
the
tokens.”

While
Ramani
himself
did
not
appear,
Judge
Lin
referenced
his
co-defendants
in
the
Department
of
Justice
case
against
Ishan
and
Nikhil
Wahi.

“Ramani’s
co-Defendants
have
largely
admitted
many
of
the
allegations
in
pleading
guilty
in
the
parallel
criminal
proceeding,”
she
wrote.

Judge
Lin
also
–
importantly
–
noted
that
her
analysis
applies
to
secondary-market
sales.

The
SEC

has
already
submitted
the
ruling
as
supplemental
authority
in
its
cases
against

Binance.US
and
Coinbase,
referencing
the
line
on
secondary
market
sales.

“In
Wahi,
the
court
held
that
a
defendant
who
purchased
certain
crypto
assets
on
trading
platforms
purchased
securities
because
the
assets
were
offered
and
sold
as
investment
contracts
under
SEC
v.
W.J.
Howey
Co.,”
the
SEC

wrote
in
a
notice
to
Judge
Amy
Berman
Jackson,
who
oversees
the

Binance.US
case.

Attorneys
for
Coinbase
pushed
back
against
the
SEC’s
use
of
the
default
judgment
ruling,

writing
that
none
of
the
amicus
parties
who
had
filed
briefs
earlier
in
the
case
moved
to
oppose
the
SEC’s
motion
for
default
judgment.

Gary
DeWaal,
senior
counsel
with
Katten
Muchin
Rosen,
LLP
–
one
of
the
law
firms
representing

Binance.US
in
its
defense
against
an
SEC
suit
–
told
CoinDesk
that
Judge
Lin
had
not
had
the
opportunity
to
have
the
issue
briefed
by
anyone
on
the
defendant’s
side.

Having
those
amicus
briefs
earlier
in
the
case
probably
didn’t
help
much.

“The
judge
probably
reviewed
[those],
but
it’s
not
as
strong
as
actually
having
a
party
of
interest,”
DeWaal
said.
The
judge
did
not
have
the
chance
to
hear
from
the
defendant
(who
did
not
mount
a
defense
or
show
up,
and
is
believed
to
have
fled
the
country).

In
a
statement,
an
SEC
spokesperson
said
the
commission
was
“pleased
with
the
district
court’s
holding
in
SEC
v
Wahi
that
crypto
asset
transactions
in
secondary
markets
can
be
transactions
in
securities.”

“On
Friday,
the
court
specifically
held
that
Howey
applies
in
that
context
and
that
Ramani’s
trades
of
certain
crypto
assets
on
secondary
market
platforms
were
transactions
in
investment
contracts,”
the
statement
said.
“We
will
continue
to
hold
accountable
those
who
violate
the
federal
securities
laws,
including
with
respect
to
crypto
assets
in
the
secondary
markets.”

If
you’ve
got
thoughts
or
questions
on
what
I
should
discuss
next
week
or
any
other
feedback
you’d
like
to
share,
feel
free
to
email
me
at

nik@coindesk.com
or
find
me
on
Twitter

@nikhileshde.

You
can
also
join
the
group
conversation
on

Telegram.

See
ya’ll
next
week!